It is very important that when you want to enter into an option agreement you get a solicitor to do the legal contract for you. We are property law specialists who are ready, willing, and able to handle lease option matters.
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The length of the lease option typically lasts between 1 and 3 years but is fully negotiable between the landlord and tenant. Lease option forms and contracts are based on what the tenant and landlord agree on. Most lease options tend to last between 2 and 5 years. But can be much longer.
It is imperative to note that, the option period cannot be set to longer than the term left on the mortgage on the property. The reason is that an option contract cannot extend beyond the end of the mortgage term, it is at this point that the mortgage is due to be repaid. Most property owners repay their mortgage monthly or at the point, they sell their house. This means the option holder needs to exercise their option before the mortgage term expires.
What is a lease option agreement?
A purchase lease option is a contract between the lessor and the lessee permitting the latter to optionally purchase the property during or after the lease period ends. It aids both entities in managing a mutually beneficial property agreement. In other words, it is a legal arrangement that allows you to control and produce revenue from a property, with the right (but not the obligation) to purchase it later.
These are two different agreements bundled into one, that is the lease agreement and the option. In a lease – which is not a lease in the legal sense, but instead a common-law tenancy – the tenant agrees to a monthly payment to the owner of the property. It also allows them to manage the property and to also rent it out for a profit. For an option, the tenant who becomes the landlord during the tenure of the option agreement agrees on a price at which, if they want, can purchase the property later.
There are four key terms that need to be decided at the core of every purchase lease option agreement:
- The monthly charge, usually regardless of what the owner wants to finance their mortgage and all other expenses.
- The buying price at which you have the option to purchase the property in the future
- The term of the agreement, being the length of time you have to return the property if you haven’t used the option to buy. In return for the option, the upfront payment you will owe them (which in law is called consideration)
- There must be some upfront charge for the arrangement to be legally binding, but this can be for as little as one pound. So, if you’ve heard people talk about “buying a £1 house”? They’re likely to be referring to purchase lease options.
Who can benefit from lease option agreements?
Landlords benefit from lease option agreements for the reasons listed as follows:
- Attract responsible tenants: Most tenants with first-time homebuying intent are likely to take care of your property since they’re looking to buy it once the lease ends.
- Locked-in purchase price: The housing market is always changing, but a lease-to-own agreement ensures the agreed upon purchase price remains the same.
- Upfront payment from buyer: Most lease-to-own agreements require the buyer to put down a non-refundable option fee to grant them exclusive rights to buy the property.
- Default benefit: If your tenant decides to default on buying your property, you’ll be able to keep the down payment once the lease ends.
- On-time rent payments: Tenants looking to sign a lease-to-own agreement are usually financially ready a mortgage, meaning there’s a higher chance you’ll get paid on time each month.
- Actively save for a down payment: The rent credits your tenant receives can be put aside each month to go towards their down payment once the lease ends.
- Improve credit score
- Build equity: The tenant can build equity if the home value increases above the agreed upon purchasing price while renting.
Are lease options legal?
Yes, they absolutely are legal. They’ve been used in English law for many years. The basic concept of a lease option contract means that a ‘buyer ‘(i.e., the lease option company or investor) pays you an upfront amount (i.e., the option fee) so they have the right to buy your home in the future. This is whilst they pay you a monthly rent to cover your mortgage (i.e., the lease). Both parts of this contract, that is the ‘option ‘part and the ‘lease ‘part are both legal contracts in the UK. What has happened in relation to a lease option is the bringing together of these two forms of legally binding contracts into one single contract.
These contracts are drawn up by a solicitor, assuming you use a reputable lease option company. You must also be separately represented by a solicitor who is experienced in lease options.
Selling a lease option agreement
Selling your home with a lease option might help you sell your home more easily to potential buyers as well as investors. This uncomplicated agreement can put more money in your pocket with very low risk. Entering into a purchase option agreement can help you pay back any outstanding mortgages before selling your home. This is accomplished by leasing your home, which provides you with rental income. A real estate lawyer will draft the documents you need and help you understand your rights and the rights of the buyer.
Although you’re not selling your house outright, you still need to do all the due diligence you would if you were selling your home.
The contract must clearly stipulate the following:
- Who is responsible for maintenance and repairs.
- Who is responsible for fees and utilities associated with the property.
- Whether the renter must obtain rental insurance.
- Whether the seller will obtain landlord insurance.
Advantages of Lease Option agreements
- For owners, it may be a chance to receive a payment up front in anticipation of a future sale or a way to sell a property which requires works they don’t wish to undertake themselves.
- An option agreement will give the potential buyer the right to service a written notice upon the seller within the option period. The notice will inform the seller that the buyer intends to purchase the property and will trigger a countdown until the purchase completion date. Completion is generally 21 days following service of notice (although the parties can agree otherwise), so it is important that a potential buyer has conducted the necessary searches on the property and obtained financing prior to serving notice.
- You spend very little cash: only the consideration rather than a 10 percent deposit, as little as £1
- There’s no need for you to take out a mortgage,
- Every month, you make money, just like you own it.
- You can buy it and then gain “instant equity” if the value of the price. But if it doesn’t, you can just hand back the property, in the meantime, you will have made money from it.
- the price is typically at the current market value of the home, allowing the renter to buy the home in the future at today’s price.
- The lease option is especially helpful to those who might be building their credit or don’t have enough saved for a down payment.
- The lease option also gives them flexibility in that they aren’t forced to purchase the home at the end of the lease term – they can walk away if they find another option or life circumstances force them to reconsider.
Disadvantages of lease option agreements
- For owners, there is a risk of non-payment of the rent, if the tenant doesn’t pay for any reason, they may not be able to afford the mortgage payments. Then again, that could be said with the usual tenancies.
- For the lease option purchaser, there is a risk that if the lease option documentation is not drafted properly, it may be impossible to exercise the option. That is why it is important to get a specialist lease option lawyer to help with the drafting; otherwise, you could carry out costly maintenance work, wiping out your earnings, and still not be able to purchase the property at the end.
- Lease options come with a trade-off for property owners since they may lose the chance to sell the property for a higher price. In exchange, purchase lease option buyers/tenants tend to do more than residential AST tenants in terms of maintenance and repairs.
- A pitfall for a purchase lease option seller is if the price of the property increases above the amount set in the contract, they will not be able to increase the purchase lease option sale price to that level.
Lease option agreement example
Suppose that there’s a landlord with a home valued at £200,000. It already has a tenant looking to buy a home in the future. Since both parties find the current real estate market grim, the landlord offers the tenant a lease option.
In this case, the buyer-tenant pays an extra 3% of the total house price as a fee for the lease option. They also pay a premium on their monthly rent. They then have the option to buy the property in the future at current market prices. The premium credit rent goes toward the eventual down payment.
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FAQs on Lease Option Agreements
What does a 5-year lease with a 5-year option mean?
A 5-year lease with a 5-year option means that as the purchase lease option holder you will manage and pay a monthly rent to the owner of the property for a period of 5 years. After this period you can exercise your right to purchase the property if you so wish.
What does an option mean on a lease?
The option in a lease is nearly always a ‘call’ option. It means the tenant has the right to call upon the landlord to give them a new lease, on the terms originally agreed. The tenant should make sure they have met all the obligations of the lease and give the landlord written notice. The option typically delineates the timing of notification for extension, what the rent will be under the extension or how it will be negotiated, the number of permissible extensions, how long each extension will be, and which, if any, of the original terms of the lease will be excluded from the extension. Notice that they are exercising the option.
What is the difference between lease option and lease purchase?
The difference between a lease option otherwise known as a purchase lease option and a lease-purchase agreement is that the lease option only obligates the seller to sell. A lease purchase agreement commits both parties to the lease purchase.
With a lease-purchase agreement, a renter is allowed to occupy the property for a certain amount of time while paying monthly rent to the owner. During this time, the renter is obligated to take care of the property and maintain it according to what is stipulated in the agreement. The renter promises to purchase the property by the time the contract expires. The sale of the property will be scheduled to occur with a written contract in place, and the price that is paid will be determined at the time that the contract is signed by both parties. Should the renter fail to purchase the home, they will be deemed to be in breach of the contract and the seller has the right to take legal action.
In most lease purchase contracts; the tenant gets a credit that is put towards the purchase price of the property. This money goes to the owner and is usually non-refundable. Sale barring breach of contract or the buyer’s inability to secure a mortgage.
Much of the terms of the lease-purchase agreement also apply to a lease option. The renter/purchase lease option purchaser lives in the property while paying rent and agrees to take care of the home while living there. However, that’s typically where the similarities end.
The biggest difference between these two arrangements is that the tenant is not obligated to buy the home once the contract expires. Instead, they are only buying the right to purchase the property, as opposed to making a promise to buy as is the case with a lease purchase. If the tenant decides to buy the property, they must exercise this right before the contract expires. In this case, the property owner must sell to the tenant.
What’s one of the required elements of a valid option contract?
Consensus ad idem: this is one of the essential elements of a valid contract. Consensus ad idem is a Latin term that means, simply, agreement. This is the first principle that’s the foundation of enforceable contracts because for contracts to be enforceable, an agreement or a meeting of the minds of all involved parties, is required. Parties to a contract may agree upon the same thing in the same sense.
Consensus ad idem in purchase lease option agreements means there has been a meeting of the minds of all parties involved and everyone involved has accepted the offered contractual obligations of each party.
Do options contracts have to be in writing?
Although not all contracts are required to be in writing, there are some that must provide a written document. Sale and transfer contracts for long-term contracts lasting more than one year. So, yes: purchase lease option contracts must be in writing.
By providing a written contract, both parties should be able to prevent future arguments over the purpose and terms of the contract. The contractgives certain rights and obligations to both the landlord and the tenant. As the option holder will be the landlord during the option period it is imperative that they are aware of their rights, to enforce them when necessary and know when the tenant has also breached their obligations
Who creates option contracts?
Option contracts are ordinarily drafted by solicitors. It is however the prerogative of both parties to the contract to agree on the terms that will form the basis of the contract, this entails putting together the head of terms.
HOTs are the details of the deal you have agreed with the owner of the property. Here is what you need to include on The Heads of Terms:
- Your name and address
- The owners name and address
- The address of the property on which you’re doing the Option
- The agreed purchase price
- The length of the Option term
- The Option fee you’re paying them
- Any monthly options fees to be able to use the property
- Any special conditions.
Who are the 2 parties to an option contract?
The buyer and the seller.
How long can an option contract stay open?
An option agreement on a property typically lasts between three to ten years. But the period of the option agreement can be shorter or longer by mutual agreement from both parties. Also, many property option agreements include a right to extend, should this be needed towards the end of the option agreement period.
The period an option agreement lasts will be determined by the type of property transaction in consideration.